‘A shortage of housing, coupled with record-low interest rates, has made Sydney the world’s second-most expensive property market. The city’s home prices jumped 16 per cent in the 12 months through April, helping stoke record household debt and putting ownership increasingly beyond the reach of many.’

Households are taking on record household debt to invest in a ‘sure thing’. The real estate experts say ‘Bubble…what bubble?’ At worst, in their ‘unbiased’ opinion, property prices may only rise 2% over the next 12 months. No downside here, apparently.

Yet we look at some other headlines and they are at odds with this unbridled optimism.

Here’s a snapshot of some recent headlines and extracts (emphasis is mine):

The Financial Times on 2 June 2017:

‘Disappointing US jobs growth jolts markets’

‘Markets were jolted by disappointing jobs numbers on Friday, as sluggish hiring and tame wage growth in the US overshadowed a fall in the nation’s unemployment rate to a 16-year low.’

The Financial Times on 25 May 2017:

‘UK economy slows more than expected in first quarter of 2017’

‘Economists had expected that consumer spending would slow this year as higher oil prices and more expensive import costs began to be passed on to shoppers at a time of low wage growth.’

‘China’s economy has slowed from its recent bounce, with retail sales, urban investment and industrial output all posting slower growth in April than the previous month.’

Sky News on 7 June 2017:

‘Concerns over [Australian] economy growth’

‘However, wage growth continued to be anaemic, resulting in households running down their savings. The household savings rate slipped to 4.7 per cent in the quarter, and is now down more than 2 percentage points over the last 12 months.

Is the disconnect between asset prices and the economy a permanent or temporary phenomena?

As far as I can see, none of these economic symptoms are fleeting.

Wage growth is going the way of the dinosaur. The world has way too much capacity, cheap labour and automation. Just keeping a job will be a challenge.

Fixed costs are going higher as governments, utility providers and banks all scramble for dollars.

And, unless you have a benevolent lender, debt levels are set in stone. A wave of defaults could change that but, then again, that wouldn’t be too good for markets.

Eight years of priming the pump has delivered us what?

Record asset prices and sluggish economies. The only thing that trillions of newly-minted dollars has bought central bankers is…time.

What an abject failure these so-called ‘stimulus’ policies have been. We’re in a far more dangerous position than we were in 2008.

If something cannot go on, it won’t.

If the economic symptoms are not going anywhere, what gives?

You guessed it…asset prices. Markets can plummet 50% or more in a matter of days or months. We’ve seen this happen in living memory.

We are living in a world of suspended animation. Logic dictates that this lunacy will not last.

There’s still time to act rationally to avoid capital-destroying losses. Losses that could take a decade or more to recover from.

Unfortunately, in times of rising markets, most people focus on returns.

Far too little thought is given to risk…until it’s too late.

The heart rules the head.

My investment approach is based on 99% investigation and 1% implementation. More than 30 years in the investment business has taught me that long-term wealth creation and retention is about identifying trends and being on the right side of the trend.

The divergence between asset prices and the real economy is a trend that can only end with one outcome…a severe correction. History, unequivocally, supports this view.

Implementing a buy or sell can be done with a few key strokes. Whereas the investigation process to determine the ‘what’ and ‘when’ to buy, sell or hold requires tremendous amount of research, thought and planning.

This considered approach on ‘how’ and ‘where’ to allocate your precious capital runs counter to the adrenaline-hit most investors seek. Daily lives are fairly humdrum. Same routine. Same bored faces on the train. Same lunch hour. Same lunch. Same news channel. Same news stories.

The thrill of backing a ‘winner’ or participating in a strongly-rising market adds some excitement to the daily grind. The ‘hot tip’ or ‘get-rich-quick scheme’ or ‘once-in-a-lifetime opportunity’ offers (temporarily) the chance to feel alive. This type of investing is 99% implementation and 1% investigation. Hence the high failure rate.

These mostly doomed attempts to escape the humdrum and follow the crowd invariably lead to being trapped for longer in the daily grind. Losses have to be recouped by extending your time in the workforce or making a significant adjustment to your lifestyle.

In the investing business, there are two distinct options: making gains and avoiding losses.

At present, my assessment is that risk far outweighs reward by some considerable margin.

The following table shows you the level of gain required to offset a loss.

Gowdie has painted a very bleak picture of the future, and is certainly not unfounded in his observations. Undoubtedly the incredible amount of debt that has accumulated worldwide is staggering, We have already been in “bull” territory since March of 2009, and are perhaps past due for a correction, major or minor, as the case may be. Some of the more positive aspects are (1) that Janet Yellen of the FRB of America seems , thus far, to be doing a soundly conservative job in trying to normalize U.S. interest rates. More interest rate rises are expected soon and later… Read more »

Vote Up0Vote Down Reply

6 months 3 days ago

Letters will be edited for clarity, punctuation, spelling and length.
Abusive or off-topic comments will not be posted. We will not post all comments.
If you would prefer to email the editor, you can do so by sending an email to letters@marketsandmoney.com.au

Testimonial

Just thought I would let you know that whilst I receive countless financial emails daily I view yours as something special. I am not looking for the same old humdrum I am looking for news that is out of left field. Now you guys would be off the planet if you went any further left but it is refreshingly different. I get through the humdrum first and get my mind sorted and save you for last as a check. It is certainly an insane moment in time but I am still finding investment opportunities. Thanks for your comments